PORTFOLIO ANALYSIS

INTRODUCTION
When the company is in more than one business, it
can select more than one strategic alternative
depending upon demand of the situation prevailing in
the different portfolios.
It is necessary to analyze the position of different
business of the business house which is done by
corporate portfolio analysis.
PORTFOLIO ANALYSIS
Portfolio analysis is an analytical tool which views a corporation
as a basket or portfolio of products or business units to be
managed for the best possible returns.
When an organization has a number of products in its portfolio,
it is quite likely that they will be in different stages of
development.
 Some will be relatively new and some much older. Many
organizations will not wish to risk having all their products at
the same stage of development.
It is useful to have some products with limited growth but
producing profits steadily, and some products with real growth
potential but may still be in the introductory stage
The aim of portfolio analysis
to analyze its current business portfolio and decide
which businesses should receive more or less investment
to develop growth strategies, for adding new businesses
to the portfolio
to decide which business should not longer be retained
Balancing the portfolio
Balancing the portfolio means that the different
products or businesses in the portfolio have to be
balanced with respect to four basic aspects –
Profitability
Cash flow
Growth
Risk
TECHNIQUES OF PORTFOLIO ANALYSIS
This analysis can be done by any of the following
technologies –
BCG matrix
GE nine cell matrix
BCG MATRIX
The Boston Consulting group’s product portfolio
matrix (BCG matrix) is designed to help with long-
term strategic planning, to help a business consider
growth opportunities by reviewing its portfolio of
products to decide where to invest, to discontinue or
develop products.
It's also known as the Growth/Share Matrix because it
uses relative market share and industry growth rate
factors to evaluate the potential of business brand
portfolio and suggest further investment strategies.
Each of the products or business units is plotted on a
two dimensional matrix consisting of
Relative market share – is the ratio of the market share
of the concerned product or business unit in the
industry divided by the share of the market leader
Market growth rate – is the percentage of market
growth, by which sales of a particular product or
business unit has increased
The Boston Consulting Group’s
Growth-Share Matrix
High
Stars Question marks
4
?
? ?
Market Growth Rate

3 1
5 2
Cash cows Dogs
8
7
Low 6
High Low
Relative Market Share
Analysis of the BCG matrix
The matrix reflects the contribution of the products or
business units to its cash flow. Based on this analysis,
the products or business units are classified as –
Stars
Cash cows
Question marks
Dogs
Stars – high growth, high market share
Stars are products that enjoy a relatively high market share
in a strongly growing market.
They are potentially profitable and may grow further to
become an important product or category for the company.
The firm should focus on and invest in these products or
business units. The general features of stars are -
High growth rate means they need heavy investment
High market share means they have economies of scale and
generate large amount of cash
But they need more cash than they generate
The high growth rate will mean that they will need heavy
investment and will therefore be cash users.
Overall, the general strategy is to take cash from the cash cows to
fund stars.
Cash may also be invested selectively in some problem children
(question marks) to turn them into stars. The other problem
children may be milked or even sold to provide funds elsewhere.
Over the time, all growth may slow down and the stars may
eventually become cash cows. If they cannot hold market share,
they may even become dogs.
Cash Cows – Low growth, high market
share
These are the product areas that have high relative
market shares but exist in low-growth markets.
The business is mature and it is assumed that lower
levels of investment will be required.
On this basis, it is therefore likely that they will be
able to generate both cash and profits.
Such profits could then be transferred to support the
stars
Features of cash cows
They generate both cash and profits
The business is mature and needs lower levels of
investment
Profits are transferred to support stars/question marks
The danger is that cash cows may become under-
supported and begin to lose their market
Although the market is no longer growing, the cash
cows may have a relatively high market share and
bring in healthy profits.
No efforts or investments are necessary to maintain
the status quo.
Cash cows may however ultimately become dogs if
they lose the market share.
Question Marks – high growth, low market
share
Question marks are also called problem children or wild
cats.
These are products with low relative market shares in high
growth markets.
The high market growth means that considerable
investment may still be required and the low market share
will mean that such products will have difficulty in
generating substantial cash.
These businesses are called question marks because the
organization must decide whether to strengthen them or
to sell them.
features of question marks
Their cash needs are high
But their cash generation is low
Organization must decide whether to strengthen
them or sell them
Although their market share is relatively small, the
market for question marks is growing rapidly.
Investments to create growth may yield big results in
the future, though this is far from certain.
Further investigation into how and where to invest is
advised.
Dogs – Low growth, low market share
These are products that have low market shares and
low growth businesses.
These products will need low investment but they are
unlikely to be major profit earners.
In practice, they may actually absorb cash required to
hold their position.
They are often regarded as unattractive for the long
term and recommended for disposal
features of dogs
They are not profit earners
They absorb cash
They are unattractive and are often recommended for
disposal.
Turnaround can be one of the strategies to pursue
because many dogs have bounced back and become
viable and profitable after asset and cost reduction.
The suggested strategy is to drop or divest the dogs
when they are not profitable.
 If profitable, do not invest, but make the best out of
its current value.
This may even mean selling the division’s operations.
ADVANTAGES OF BCG MATRIX
it is easy to use
it is quantifiable
it draws attention to the cash flows
it draws attention to the investment needs
LIMITATIONS OF BCG MATRIX
It is too simplistic
link between market share and profitability is not
strong
Growth rate is only one aspect of industry
attractiveness
It is not always clear how markets should be defined
Market share is considered as the only aspect of overall
competitive position
Many products or business units fall right in the
middle of the matrix, and cannot easily be classified.
BCG matrix is thus a snapshot of an organization at a
given point of time and does not reflect businesses
growing over time.
GE Nine-cell matrix
GE Nine-cell matrix
This matrix was developed in 1970s by the General
Electric Company with the assistance of the
consulting firm, McKinsey & Co, USA. This is also
called GE multifactor portfolio matrix.
The GE matrix has been developed to overcome
the obvious limitations of BCG matrix. This matrix
consists of nine cells (3X3) based on two key
variables:
business strength
industry attractiveness
GE Nine Cell Matrix
Industry Business Unit Strength
Attractiveness

Strong Average Weak

High Grow Grow Hold

Medium Grow Hold Harvest

Low Hold Harvest Harvest

Business Strength
The horizontal axis represents business strength and the
vertical axis represent industry attractiveness
The business strength is measured by considering such factors
as:
relative market share
profit margins
ability to compete on price and quality
knowledge of customer and market
competitive strengths and weaknesses
technological capacity
caliber of management
 Business Strength

 Current market share

 Brand image
 Production capacity
 Corporate image
 Profit margins relative to
competitors
 R & D performance
Promotional effectiveness
Industry/ Market Attractiveness
Industry attractiveness is measured considering such
factors as :
market size and growth rate
industry profit margin
competitive intensity
economies of scale
technology
social, environmental, legal and human aspects
 Market Attractiveness

 Annual market growth rate

 Overall market size
 Historical profit margin
 Current size of market
 Market structure
 Market rivalry
 Demand variability
 Global opportunities
The nine cells of the GE matrix represent various
degrees of industry attractiveness (high, medium or
low) and business strength (strong, average and weak).
 After plotting each product line or business unit on
the nine cell matrix, strategic choices are made
depending on their position in the matrix.
GE matrix is also called “Stoplight” strategy matrix because the
three zones are like green, yellow and red of traffic lights.
Green indicates invest/expand – if the product falls in green zone,
the business strength is strong and industry is at least medium in
attractiveness, the strategic decision should be to expand, to invest
and to grow.
Yellow indicates select/earn – if the product falls in yellow zone, the
business strength is low but industry attractiveness is high, it needs
caution and managerial discretion for making the strategic choice
Red indicates harvest/divest – if the product falls in the red zone,
the business strength is average or weak and attractiveness is also
low or medium, the appropriate strategy should be divestment.
Advantages
It used 9 cells instead of 4 cells of BCG
It considers many variables and does not lead to
simplistic conclusions
High/medium/low and strong/average/low
classification enables a finer distinction among
business portfolio
It uses multiple factors to assess industry
attractiveness and business strength, which allow
users to select criteria appropriate to their situation
Limitations
It can get quite complicated and cumbersome with the
increase in businesses
Though industry attractiveness and business strength
appear to be objective, they are in reality subjective
judgements that may vary from one person to another
It cannot effectively depict the position of new
business units in developing industry
It only provides broad strategic prescriptions rather
than specifics of business policy
EXAMPLE OF GE NINE CELL MATRIX
 About Maruti Udyog
Founded in 1981
Products are Maruti 800, Omni, Alto,SX4,Swift
Desire,Swift,A-star, Gypsy,Wagon R,Ritz,others.
Vision – “The Leader in the Indian Automobile
Industry, Creating Customer Delight and
Shareholder’s Wealth;a Pride of India”
Core Values : Our Core Values drive us in every endeavour-
 Customer Obession,
 fast, Flexible & first mover,
 Innovation & creativity
 Networking & Partnership
 Openess & Learning